Bank statements are the basis of a standard purchase loan. Without approved funds, you cannot close on a home. Now that you want to refinance, are they still necessary? You already own the home so you don’t have to put money down. Maybe you just want to change the terms of your loan or possibly take cash out of the equity of your home. Are bank statements necessary since you don’t have to bring any money to the table? The answer has two sides – it depends on the reason for your refinance. Keep in mind that in some cases, you do have to bring money to the table even though you are not purchasing a new home.
Rate and Term Refinance
A rate and term refinance occurs when you want to change the rate or term of your loan. For example, let’s say you have a 30-year loan right now, but you want a 15-year term. You are not going to take cash out of the equity of your home; you just want to decrease the term. In this case, you may not need to provide bank statements. It depends on the lender and how well qualified you are for the loan. Here are a few situations where you may need to provide your statements for review:
- You have a high debt ratio – If the lender will accept your higher debt ratio, they may want to see your bank accounts. This helps them determine if you have liquid savings. If you have money set aside, called monthly reserves, the lender can overlook your higher debt ratio. They may require a specific number of months of reserves on hand, though. It depends on the lender and how high your debt ratio is compared to the guidelines. The more months you can cover with your assets, the higher your likelihood of approval.
- You have a borderline credit score – If your credit score is right on the cuff of the guidelines of a specific program, the lender may require what they call compensating factors. These “good things” help to make up for the risk you pose. In this case, a compensating factor would be cash reserves. If you can prove that you have the ability to pay your loan for a specific number of months, usually 6-12 months suffice, then the lender might be able to overlook your borderline credit score. This will vary by lender, though, so make sure to shop around to find a willing lender.
In most other cases, however, you don’t need to verify the amount of money in your bank account for a rate/term refinance. Usually this type of refinance works to the lender’s benefit whether you lower your interest rate or reduce your term. If you lower your interest rate, the payment decreases, which means it is easier to afford. If you decrease the term, the lender receives their money faster. In their eyes, it is a win-win situation.
Cash Out Refinance
Where things tend to get tricky is with a cash out refinance. In this case, you pose a higher risk to the lender no matter how good your credit score or debt ratios are at the time. Taking cash out of the equity of your home means the lender takes on a higher risk with a higher loan-to-value ratio. The reason for your refinance will help the lender determine if they need to see your bank statements. Here are a few examples:
- Taking cash out to fix up your home – Let’s say you want to remodel your kitchen or put on an addition. You need to refinance in order to have the cash to do so. In this case, the money the bank provides you gets invested right back into the home. Hopefully the home will appreciate and the lender’s investment will become less risky. If you were to default on the loan, the lender could likely get their money back by selling the newly appreciated home on the market. In this case, they may want to see a few months’ worth of reserves on hand, but not as much as they would for other situations.
- Consolidating debt – If you have numerous debts and you want to consolidate them into one loan, the lender may want to see your bank statements. This will help them see the consistency of your deposits as well as whether or not you have any reserves on hand. Consolidating debt into a mortgage is risky business for lenders. They put their neck out to help you get out of debt in the hopes that you will be able to afford the larger monthly payment. Knowing that you have reserves on hand or consistent deposits can help put their mind at ease.
Another factor the lender considers is whether you need to bring cash to the closing. Anytime you need to provide cash at the closing, it must be verified. You cannot just show up with several thousand dollars – the lender has to verify the money belongs to you. If they didn’t take this step, you could take out a new loan without the mortgage lender’s knowledge. If you use that money to pay the closing costs or any other costs at the closing, you have a new debt. This would increase your debt ratio and increase the risk the new lender takes. Taking the time to verify your assets will help the lender feel confident that you are not incurring any other debts to close on the mortgage.
The bottom line is it is up to lender discretion whether you must provide bank statements for a refinance. In any case, it can only better your position for approval. The more reserves you have on hand, the less risk you pose to the lender. As a general rule, lenders like to see at least 2 months’ worth of mortgage payments in your bank account. If you can at least prove that amount, your statements can help your chances of securing a mortgage approval.